True or False: Assume most athletic apparel bought by U.S. consumers is imported from other nations. If all else is constant, an increase in the price of foreign-made athletic apparel will cause the U.S. Consumer Price Index to increase more than the GDP deflator.
False
Understanding Consumer Price Index (CPI) and GDP Deflator
The statement provided is true. The Consumer Price Index (CPI) measures the monthly price change in a basket of goods and services that a typical household purchases. It is commonly used to gauge inflation in an economy. On the other hand, the GDP deflator is a measure of inflation based on the prices of all domestically produced goods and services.
Difference Between CPI and GDP Deflator
CPI includes all products within the consumer basket, which means it takes into account imported goods as well. On the other hand, the GDP deflator only considers products produced within a country, excluding imported goods. This key difference is essential in understanding how changes in the price of foreign-made athletic apparel would impact the CPI and GDP deflator differently.
Effects of Price Increase on Foreign-made Athletic Apparel
When the price of foreign-made athletic apparel increases, this change will only be reflected in the calculation of the CPI. Since the GDP deflator does not include imported products, it will not be affected by the price increase of foreign-made athletic apparel. Therefore, the statement that the U.S. Consumer Price Index would increase more than the GDP deflator is false.
In conclusion, the CPI and GDP deflator serve different purposes in measuring inflation rates. The CPI reflects changes in consumer prices, including imported goods, while the GDP deflator focuses on domestically produced goods and services. Therefore, an increase in the price of foreign-made athletic apparel will impact the CPI more than the GDP deflator.